04 May Penalty clauses

The High Court has held, obiter, that whether a clause is a penalty cannot depend upon the ability of the particular contract-breaker to pay the specified amount, or the source from which he has to pay. The penalty doctrine focuses on the lack of proportionality between the amount of the secondary liability imposed and the innocent party’s legitimate interest in performance of the primary obligation.

The court was considering various questions of interpretation of the complex documentation relating to a commercial mortgage backed securitisation (CMBS) transaction arranged in 2006 by Lehman Brothers International (Europe). The judge took the opportunity to restate in succinct terms the techniques of interpretation and implication of terms which are available when something appears to be missing from the express terms of a contract. Source: PLC on Employment Law